BEIJING — China is stepping up its efforts to challenge the dollar’s long global dominance in international finance. The top leadership’s intent comes in the form of a mission statement issued by the Chinese Communist Party over the weekend, laying out a blueprint for establishing the renminbi as one of two or three global reserve currencies. This would enable China to clear international trades and encourage investments without having to depend on the American financial system.
And this announcement is not coincidental. Geopolitical tensions and a weakening US dollar have added to market anxiety. With the dollar at its lowest value in four years and gold prices soaring to record highs of more than $5,500 an ounce, Beijing is betting that it has a rare opportunity to offer its currency as a viable and dependable alternative. Could China actually persuade the world to trade in their dollars for the renminbi?
Building a Stronger Central Bank
President Xi, who is effectively now ruler for life in China, seems to envision a “strong currency,” which would be widely used in international trade. To achieve this, he has demanded that China should have a “powerful central bank” able to steer the renminbi’s value and set global pricing for key commodities such as oil and metals. By making such statements now, China is trying to present itself as a reliable partner at a time when the United States’ economic policies, including new trade tariffs, have spooked some countries.
For decades, the US dollar has been the world’s “go-to” currency, in large part because it is considered the safest place to keep money. And yet the trend of “de-dollarisation,” with countries searching for ways to trade while bypassing the dollar, is accelerating. Countries that worry they might become a target of American sanctions or trade duties are increasingly in search of ways to hedge their bets, and China is eager to fill that void.
Breaking the Gold-Backed Legacy
The US dollar has dominated the world economy for more than 80 years. This all began in the aftermath of World War II, when the dollar was crowned as the gold-backed international standard to conduct global trade. As the issuer of the world’s reserve currency, the United States wields enormous power, to borrow money on better terms and to use financial sanctions as a tool of foreign policy.
China is trying to break this “financial hegemony.” Beijing, by elevating the renminbi’s role, also seeks to protect itself from US pressure and expand its own political influence. The I.M.F. accords special status to a handful of the world’s major currencies, but none has threatened the dollar’s supremacy. China’s game plan is to construct a “multi-polar” system in which the dollar is just one of a handful of equals.
Real-World Gains in Trade
China has already made excellent headway in persuading other countries to use its money. The renminbi’s use in trade rose to record levels recently, particularly for deals with Russia and other emerging nations. China has also slashed the red tape facing foreigners who buy Chinese stocks and bonds, and made the country’s systems for cross-border payments faster and cheaper.
But a big roadblock is in China’s path. A country cannot be a real global reserve currency without the freedom of money moving in and out. China now tightly manages its currency to maintain a stable economy. Most experts think that so long as these “capital controls” are in place, big banks and foreign governments will be wary of putting too much of their wealth into the renminbi.
The Long Path to Dominance
Even under the present plan, the renminbi has a long way to climb. As of now, the dollar comprises an approximately 57 per cent share of global foreign exchange reserves and the renminbi only about 2 per cent. “The tides are turning,” but the dollar is still “the dragon that rules” for now.
President Trump has already made it clear he would fight any push to swap the dollar. He has pledged to impose 100% tariffs on countries, including the BRICS bloc of Brazil, Russia, India, China and South Africa, who try to form a new currency in competition to the US. Even if China doesn’t replace the dollar tomorrow, Beijing has clearly adopted a long-term strategy to write down that privilege over time and win more turf on the global financial playing field.
Key Highlights
- President Xi Jinping introduced a plan to turn the renminbi into one of the world’s primary reserve currencies.
- China is exploiting a falling US dollar and high gold prices to entice new investors.
- The dollar still accounts for 57% of world reserves, but China is forging new trade relationships to dilute American power.
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